Which of the following statements regarding callable bonds is FALSE?
A)Before the call date,investors anticipate the optimal strategy that the issuer will follow,and the bond price reflects this strategy.
B)The yield to maturity of a callable bond is calculated as if the bond were called at the earliest opportunity.
C)A callable bond will trade at a lower price (and therefore a higher yield)than an otherwise equivalent non-callable bond.
D)The price of a callable bond can be low when yields are high,but does not rise above the call value when the yield is low.

Question

Quizplus · Accepted Answer

The yield to maturity of a callable bond is NOT calculated as if the bond were called at the earliest opportunity. This is because it is not certain whether the bond will be called or not, and if it is not called, the investor will continue to receive coupon payments for the remaining life of the bond. Therefore, the yield to maturity of a callable bond must be calculated based on the various possible scenarios of whether the bond will be called or not.

Which of the Following Statements Regarding Callable Bonds Is FALSE